Maybe a small bump in storage would be good, however, remember that the higher the capacity, the more prone to failure they will be (more parts/platters, more points of failure possible), and also, if you opt for a higher speed drive (7200 rpm) it doesn’t guarantee performance boost in every instance, but will definitely shorten your battery life when unplugged and running off the battery.
Depending on how you use your laptop (for instance, if you are finding you use it on the road the majority of the time) and your media (tunes, movies, pictures, etc.) are filling up the drive, then maybe a small portable external could be a good solution (I use one of those WD passport USB 2 drives that are bus powered, small, and fast enough for video); if most of your media consumption happens at home, then maybe consider an external drive for backup and for media (plug in the wall type). You can set up your laptop so that it references all your media from the external drive (i.e. with iTunes, you plug in the drive, fire up, then launch iTunes and you’re in business).
Lastly, consider all the apps and docs on your laptop now-how many of them do you use daily? How many of them have you used once or twice? The “once or twice” ones should be backed up and archived and taken off your laptop if they’re hogging space; same for documents. Lastly lastly (hehe), you can also look into a MobileMe account to store documents and larger media files online in the “cloud” for access only when you need them.
As for the replacement process, I think Apple has online support docs with step-by-step instructions on how to do that, plus instructions on transferring data between the drives. If I were in your shoes, I would use Time Machine and backup the entire drive before proceeding (Assuming you have an OS X Leopard OS Installer disc which you’ll need anyway to format and install on your new drive).